The Chairman of the Federal Reserve Ben Bernake recently warned that deep spending cuts could be “self-defeating to the still-fragile recovery”.
Recent data showed that the global economic recovery remains fragile. The pace of economic growth is being held back by a combination of falling house prices, weak bank lending, high oil prices and lack of confidence from business investment. The concern is that spending cuts could lead to lower economic growth and higher unemployment, this could snuff out the fragile recovery and reduce government tax income.
Ben Bernake suggested that “The solution to this dilemma, I believe, lies in recognising that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation,”
Long term plans for fiscal consolidation could focus on issues such as raising the retirement age and greater scrutiny of health care costs. These policies enable a reduction in long term spending without constraining economic growth in the short term. However, although these policies are less damaging to economic growth, they raise issues of greater inequality. For example, raising the retirement age will adversely affect low income workers the most because they often don’t have a secondary private pension. Also moderating health care costs could.
Ben Bernake also said that he felt inflation was not a long term problem, despite the recent rise in commodity prices which had pushed up headline inflation.
Despite the warnings over the fragile nature of growth – admitting that growth had been “frustratingly slow from the perspective of millions of unemployed and underemployed workers.” he appeared to rule out any further monetary easing (QE3). Markets have fallen in past few days over uncertain how the economy would regain strong economic growth; there are even increasing fears over a double dip recession in US.